Water deal could be trouble

As Mayor Richard M. Daley considers auctioning off Chicago's water system in a deal that could fetch upward of $1 billion, water privatizations in other cities are awash in controversy.

As Mayor Richard M. Daley considers auctioning off Chicago's water system in a deal that could fetch upward of $1 billion, water privatizations in other cities are awash in controversy.

Atlanta scrapped a 20-year deal to outsource management to a private firm after it produced rising costs and cloudy water. Even in Indianapolis, where the privately run water system is considered a national model, there have been complaints about big rate hikes and even a class-action lawsuit claiming overbilling.

Closer to home, the southwest suburb of Homer Glen is fighting a 33.7% rate hike request by Illinois-American Water Co., a 23.5%-owned affiliate of RWE A.G., a large German utility.

"We've been powerless to have any expectations or standards," says Mary Niemiec, a trustee and co-chair of community and economic development in Homer Glen.

"Our rates reflect the true cost of providing water service," a company spokeswoman says. But Illinois Attorney General Lisa Madigan has joined residents and businesses opposed to it, arguing Illinois-American has overstated its costs and the profit margin it needs.

City Hall isn't speaking publicly about a water deal, and there's no sign it has taken any steps in that direction. But the mayor has declared that "nothing is off the table" in terms of tapping infrastructure for cash, while acknowledging that water privatization would be controversial.

To see just how controversial, City Hall could look 90 miles north, where a mere proposal to study the idea of leasing the city's water system led to public rallies, petition drives and union opposition, forcing the Milwaukee City Council to table the initiative this past summer.

"Water is such a basic resource, people get nervous," says Milwaukee Comptroller Wally Morics, who floated the idea of granting a lease of 50 years or more in exchange for an upfront payment topping $500 million.

In Chicago, opposition already is forming among City Council members who feel burned by the privatization of city parking meters. Chicago Alderman Scott Waguespack (32nd) has put his staff to work researching the drawbacks of water privatization in the event the mayor proposes moving forward with it.

"I've talked to a lot of aldermen, and they are really wondering what's shaking with it," Mr. Waguespack says.

"Parking meters were kind of a nebulous idea, too," and then the City Council was given only two days to consider it before voting, he says. In cities with privatized water systems, he notes, "rates increased dramatically, and the accountability factor goes out the door. You're stuck with the contract you have, like parking meters for 75 years."

And yet for City Hall and potential private operators, the water system may be too tempting to pass up. It produces a steady stream of revenue: almost $380 million in Chicago last year. Experts say a privatization deal could fetch $1 billion or more for the city.

"We run the water system for Paris  Chicago wouldn't be outside the realm for us," says a spokesman for New Jersey-based United Water Resources, a subsidiary of Suez Environnement S.A., a French utility company.

While Atlanta is a well-known example of a water privatization deal that failed  after four years of disputes over costs and water quality, the city rescinded a 20-year contract with United Water  private management has worked better in Indianapolis.

In 2002, the city outsourced water system management to Veolia Water, a unit of French conglomerate Veolia Environnement S.A., averting a proposed 30% rate hike and freezing rates for five years. Last year, the company was paid about $50 million, including about $10 million in incentive payments after meeting 96% of its performance targets, a spokesman says, adding that Veolia has invested about $20 million in water-quality monitoring and customer service improvements.

However, a glitch in estimating water usage led to overbilling thousands of residential customers in 2007 and 2008, according to a class-action lawsuit brought by about 300 of those affected. "People on fixed incomes were making choices between medicine and food and their water bill," says Peter Kovacs, the Indianapolis attorney who filed the suit. Some got credits as high as $2,500 to adjust their bills, he adds.

The problem apparently was fixed, but the Indiana Utility Regulatory Commission is looking into it, too. A Veolia spokesman declines to comment, except to note that a rate increase and drought that caused significant swings in water usage were going on at the same time.